Financial Controls During Project Development REF#6120

In order to minimise financial risks within the real estate and construction sector, many countries have minimum capital requirements that must be met before a construction permit can be issued for a project. The developer must be able to demonstrate that it holds capital equivalent to a certain percentage of the value of the project. 

Prakas No.89 on the Management of Real Estate Development Business, issued 20 January 2020, has sought to address this concern by setting that  if a residential or co-owned building developer intends to sell units to raise funds as construction progresses, it must have a cash deposit on an account opened at the National Bank of Cambodia (or any local commercial bank) or a bank guarantee of 2% of the total construction costs. The residential or co-owned building developer shall also obtain a letter issued by any banking or micro-financial institution in Cambodia confirming that the capital and source of capital of the developer is at least 20% of the total construction costs if the developer intends to sell units to raise funds as construction progresses. In the case of land development projects, the cash deposit or the bank guarantee shall correspond to 5% of the total construction costs. Also, this Prakas No.89 provides that the security deposit on a residential or co-owned building development business may only be withdrawn once the residential or co-owned building development project is at least 70% completed. 

While this decision was certainly welcomed, our members consider this requirement to be insufficient to act as an adequate safety net for consumers and the overall market if a project was to collapse. 

As a regional comparison, developers in Malaysia are restricted in accessing buyers’ funds, as developers can only accept an initial 10% deposit before construction begins and thereafter payment is made in instalments according to the stage of works completed, ranging from 5% – 15% of the purchase price. These funds are deposited into a Housing Development Account regulated by Malaysia’s Ministry of Housing, and are only accessible when progress is certified by the architect responsible for the project, ensuring appropriate access to funds while also protecting consumers if a project were to fail. Such provisions do increase the cost of embarking on a project but prevent developers from beginning projects that are financially dependent upon pre-sales funds, these projects are often at higher risk of running out of money prior to completion. 

Developers undertaking projects without sufficient starting capital represent a major risk to the Cambodian real estate market and by extension, the entire national economy. If one project were to financially collapse prior to completion, this would likely affect confidence in the market and have a knock-on effect whereby pre-sales for other projects would decline or withdraw. If this were to occur, it could trigger a ‘domino effect’ on the Cambodian real estate sector and lead to a market crash.

Accordingly, it is within the interests of the Royal Government of Cambodia and all stakeholders to introduce stronger financial controls to regulate residential development projects to provide suitable protection and ensure the sustainable growth of the Cambodian economy.